The plaintiffs say the failure has allowed big banks to continue charging unjustifiably high swipe fees and has discouraged price competition among credit card networks.

“The Federal Reserve was required by law to come up with swipe fees that were ‘reasonable’ and ‘proportional’ but what we got were neither,” NRF senior vice president and CEO general counsel Mallory Duncan said in a statement released by NRF. “Instead, the Fed allowed themselves to be influenced by the very banks they are supposed to regulate and raised the originally proposed cap to include expenses the law said were not allowed.”

In doing so, Duncan said the Fed gave away half the savings that could have been seen by merchants and their customers. We want them to go back and follow the law this time.

“Rather than following the law, it’s almost as if the banks and the Fed were working hand-in-glove to block the genuine competition and common-sense price reductions Congress directed,” Duncan said. “The Fed’s regulations have blunted the competition that would have made greater savings possible.”

The regulations, which took effect Oct. 1, have also led to an increase in swipe fees for some small-ticket purchases, the lawsuit says.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the Federal Reserve to set guidelines that would result in debit card swipe fees that are “reasonable” and “proportional” to banks’ costs in processing debit card transactions. Financial institutions with less than $10 billion in assets were exempt.

The Fed said in December 2010 that it had determined that it costs banks an average 4 cents to process a debit transaction, and proposed that the fees be capped at no more than 12 cents per transaction – triple banks’ actual cost. After intense lobbying by banks and the card industry, however, final regulations adopted in July 2011 set the cap at more than five times the actual cost – 21 cents plus 0.05% of the transaction and, in most cases, an additional 1 cent for fraud prevention.

While the Dodd-Frank law said the Fed could consider the incremental costs of acquiring, clearing and settling each transaction and specifically prohibited any other expenses from being used to inflate those costs, the lawsuit alleges that the Fed – under pressure from the banks and card industry – included costs that were barred by the law. Doing so has deprived merchants and their customers of the full extent of the swipe fee relief to which they were entitled.

The approximate 21-cent cap would lower swipe fees for most purchases, which averaged 44 cents but could range as high as several dollars under the previous formula of 1% to 2% of the transaction amount. This fall, however, both Visa and MasterCard announced that they would charge the maximum amount even on small-ticket transactions the card industry previously processed profitably for as little as 6 cents to 8 cents. The move would severely impact many members of NRF’s National Council of Chain Restaurants division, whose transactions often amount to only a few dollars.

“Congress passed this law to cap swipe fees but the banks have turned a ceiling into a floor and raised fees dramatically higher for quick-service restaurants across the nation,” NCCR Executive Director Rob Green said. “This clearly was not the intent of Congress.”

The plaintiffs also said that the Fed’s final rules discourage competition among debit card networks. In order to establish a competitive market between networks such as NYCE, Pulse and Plus as well as the Visa and MasterCard networks, the law required that merchants be given a choice of two networks on every transaction. Under the Fed’s final regulations, however, banks can limit their cards such that merchants may never have a choice of networks. The lack of competition will allow the dominant networks to continue increasing their fees.

“The proposed rules followed the law, but the Federal Reserve Board changed its view of the law midcourse and without justification when issuing the final rules,” Doug Kantor, a partner at the Washington law firm of Steptoe and Johnson and lead counsel in the lawsuit, said in a statement. “Not only did the final version fail to introduce competition, it provided a loophole for the big banks to exploit and actually increase some fees. The Fed’s job was to implement the law as written and it did not do that.”

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